On April 17, 2019, the Office of Information and Regulatory Affairs proposed a second set of new opportunity zone (OZ) regulations. According to the U.S. Department of the Treasury, if finalized, the rules would make it easier for investors to comply with a requirement that OZ investment funds hold 90% of their assets in qualified property and would expand on safe harbors for working capital. The second set of regulations can be found here.
Six major updates that investors should consider, include:
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Multi-asset funds were given a boost because the regulations permit asset-by-asset sales by qualified opportunity funds.
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Sponsors cannot enjoy OZ benefits on carried interests—investments must be for cash or property, not for services.
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Transfers resulting from death of investors do not result in a loss of OZ benefits. This removes a significant concern for investment advisors contemplating advising high net worth individuals to invest in qualified opportunity funds.
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Investments in operating a business are made easier—the regulations provide guidance on (i) the calculation of gross income, (ii) the ability of businesses to use leased property, (iii) expanding the reasonable working capital safe harbor to include development of a trade or business (and not just construction/rehabilitation, as provided in the prior regulations), and (iv) calculation of asset values for purposes of asset tests.
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Qualified opportunity funds are given six months to invest contributed cash before it is included in the calculation of the 90% test.
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Property vacant for at least five years does not require substantial improvement (i.e., doubling of basis) because it can rely on the original use test.
